10-question business survival test

Why do only 30% of closely held businesses survive to the second generation?

I am grateful to Randy Coe, former Director of the Family Business Centre, Louisville University, Louisville USA, for allowing me to publish this article.

Jeffrey Davidson of the Deloitte & Touche CPA firm believes it is because they do not take the time to plan for the future. Only 28% have succession plans, plans which provide for the transfer of management, not just the transfer of ownership.

So, Davidson has developed a 10-question business survival test, which business owners may take to help them realise that they have some work to do. Many owners believe they will live forever, but there must be a succession plan in place so that the company can successfully fund the owner’s retirement.

Lots of families have members with personal problems that can have a negative impact on the family business. But, the common denominator is the success of the business, which all members need to stay alive economically. This can be the important first step, on which all members can agree to start any discussion.

As Davidson points out, family members in management may have totally different interests than members who are only shareholders. But conflicts must be worked out, or else people have to be bought out or the company must be sold.

Business owners may have a vision for the future, but have never articulated it to anyone. The rest of the family, and other key management people, should have an opportunity to buy into the vision.

Anyway, here are Davidson’s 10 questions, which may make you think about ensuring the survivability of your business:

  1. Have you defined your personal goals and vision for the transfer of ownership and management?
  2. Is your successor identified, ready, and in place?
  3. What is the importance of family involvement in the leadership and ownership of the company.
  4. Are you currently using techniques to mitigate or eliminate estate taxes?
  5. Do you have buy-sell agreements in place?
  6. Do you have enough liquidity to avoid the forced sale of your business?
  7. Have you had your business valued recently?
  8. Do you have a contingency plan should you become disabled?
  9. Have you considered different corporate structures of stock transfer techniques to help you achieve your goals?
  10. Are you going to depend on your business to meet your retirement cash flow needs?

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